With leisure demand stronger than anticipated in the fall, STR and Tourism Economics slightly upgraded the final 2020 U.S. hotel forecast released during the virtual NYU International Hospitality Industry Investment Conference.
“We just need to remain calm and know that it will get better,” said Amanda Hite, president of STR, as the conference’s Statistically Speaking session kicked off.
By the Numbers
Regardless of the short-term upgrade, the forecast for 2021 remains functionally unchanged and full recovery in revenue per available room is unlikely until 2024. U.S. hotels have been just below 50 percent occupancy for about four months, Hite estimated, driven by the leisure market. “That's really the only demand there is out there—no group demand, very little business demand, no international demand—and until those demand drivers come back, we expect occupancies to hang around that 50 percent mark for definitely the remainder of the year.”
Average daily rate is down about 20 percent year over year. “And that's across all hotel classes,” Hite said. “But what we have begun to see in the last couple of weeks is that the premium of ADR between classes is shrinking. So, the smaller premiums are leading to increased competition competition between classes because hotel guests can now sort of trade up at a much lower rate. And then [revenue per available room] is below 50 percent.” RevPAR has been hovering at that rate for about six weeks so far, she added, after hitting rock bottom in April. “We are making the slow climb, but we don't expect any significant changes from where we are right now between now and the end of the year.”
Among the different segments, 68 percent of limited service hotels have been able to remain profitable, Hite noted, even at 40 percent occupancy, whereas full-service hotels need to reach 50 percent occupancy to turn a profit, depending on location. The economy and lower-midscale segments are seeing the most occupancy gains, Hite added, a decided change from pre-COVID, when upscale and upper-midscale segments led occupancy. “The lower-tier classes are significantly outperforming in terms of occupancy,” she said, noting that these factors determine which hotels will survive the pandemic. “We've got luxury and upper-upscale hotels at a much higher temporary closure rate than what you see in the lower-tier segments.”
“Hotels very rarely permanently close,” said Stephen Rushmore, Jr., president & CEO of HVS. “They may change owners. They may come back [in] a year or two or three with a different owner, but it's pretty unusual for a hotel to really change its real estate.” Converting a hotel to residential or office use takes years, he noted, and a downcycle will frequently turn around by that point. “The yields on that you get on the hotel are some of the best when it comes to commercial real estate, so the only time that you really see hotels being converted to another use—like a permanent closure or transition—is in the luxury [or] very high end real estate market.” While hotels may change hands, he said, the overall amount of hotel closures will be insignificant—“even though this has been a very severe downturn.”
Since the worst days of the downturn, Hite said, most hotels that closed nationwide have reopened. “Where we are still seeing significant temporary closures are obviously New York [and] San Francisco. Oahu, [Hawaii], still has 40 percent of its rooms closed, San Francisco has about 20 percent of rooms that are still temporary closed and Orlando, [Fla.] is at 11 percent.” STR expects permanent closures to be up this year as compared to previous years, Hite added, but previous years have had very low closure rates. “What we're anticipating for 2020 is about 60,000 closures, which that's still only one just over 1 percent of existing supply.”
STR and Tourism Economics project the industry will recapture 80 percent of demand by the end of 2021, although RevPAR will be 34.2 percent lower than in 2019.
“The first quarter of next year is going to continue to be hard,” Hite said, but noted that a vaccine could help bring business travel back in the second half of the year. “We expect in the Q2 of 2021 is where we'll start to see some essential meetings coming in and small- [and] medium-sized events [are] really going to help with demand.” STR is forecasting 52.2 percent occupancy by the end of the year. “We will actually achieve 80 percent of our 2019 demand by the end of 2021,” she added.
ADR and revenue will follow a slower recovery timeline, putting the industry on pace for full demand recovery at the end of 2023 and a return to pre-pandemic RevPAR levels by the close of 2024.
Similarly, hotel values have taken a hit during the downturn, but Rushmore said the decline was not as bad as feared. “Values are only going to [continue] improving and getting stronger,” he said.